What does the expansion of the unfair contract terms legislation mean for FBAA members?

What does the expansion of the unfair contract terms legislation mean for FBAA members?

The Federal Government has decided to extend the existing unfair terms provisions of the Australian Consumer Law to contracts entered on or after 12 November 20161 where:
• the other party has agreed to a standard form contract;
• the other party is a business with fewer than 20 employees (a small business); and
• the upfront price payable under the contract does not exceed $300,000.00, or $1,000,000.00 if the contract runs for more than 12 months.

If a term in such a contract is declared by a court or tribunal to be ‘unfair’ it will no longer apply and will be void.2 In such a case, you may be required to pay compensation to the other party, and regulators such as ASIC or the ACCC can also release online media statements about the matter.

Will the laws apply to the contracts you have with your clients?

The laws will apply to standard form contracts for the supply of goods and services or for financial products. If you act as an intermediary for a lender, or if you provide advice to a customer about loans and credit providers, it is likely that a contract which is in standard form will fall within this category.

The contract must be a standard form contract for the new laws to apply to it. A court will consider numerous factors in determining if a contract is a standard form contract. Factors such as whether the contract was offered on a ‘take it or leave it’ basis and whether the contract is a fixed, generic set of terms may suggest the contract is a standard form contracts. Examples of standard form contracts include mobile phone plans and car rentals.

The laws will not apply to most contracts of insurance, the constitutions of companies, contracts for the shipping of goods, contracts that are not standard form contracts, contracts entered prior to 12 Nov 2016 (unless varied or amended) and contracts in sectors exempt by the Minister (none yet!).

Is the business a ‘small business’ with fewer than 20 employees?

Determining whether the party you are contracting with has less than 20 employees can be difficult to determine, because employees who are engaged on a “regular and systemic” basis are included in the headcount. This is a concept from employment law, but basically, staff who are permanent full-time, permanent part-time and casual workers or rostered workers who work fairly regular hours may also be included.

1 If a contract was entered into before 12 November 2016, and a particular term of the contract is varied on or after 12 November 2016, the new laws will apply to that term but not to the remainder of the contract.
2 If the contract cannot operate without the clause, the whole contract becomes null and void.

Due to the difficulty in being able to obtain sometimes confidential information as to the work structure of the party you are dealing to determine whether it is a small business, you may wish
to take a conservative approach and ensure that none of your contracts include blatantly unfair terms.

Is the term unfair?

The definition of unfair is contained in the Australian Consumer Law.3

A term will be unfair if it causes a significant imbalance in the parties’ obligations and rights under the contract (such as where one party has less onerous termination rights than the other), it would cause financial or other detriment to one party if it were enforced and if it is a term that is
not actually necessary to protect the genuine interests of the party who would benefit from its enforcement. The courts will also consider the contract as a whole and the transparency of the
term; does the contract set out the term clearly in plain English, or is the term difficult to follow and understand?

Some clauses which are likely to be considered unfair are those allowing one party to vary the contract without the other party’s consent or giving the other party the right to terminate the contract at its discretion.4

Terms that define the main subject matter of the contract or set the upfront price payable under the contract cannot be unfair contract terms; nor are terms required or permitted by law.

Will terms allowing a bank to claim commission “clawbacks” ‘unfair’?

This will depend whether:
• the broker is a ‘small business’ (as described above);
• whether the terms of the commission agreement between a broker and the credit provider is in a standard form;
• whether the clawback provision is ‘unfair’ in all the circumstances – this will depend on factors such as whether the credit provider insisted on the standard form on a “take it or leave it basis”, whether the broker had an opportunity to negotiate on the terms, whether the clawback in the particular instance is considered necessary to protect the legitimate interests of the credit provider, whether the clawback provision is easy to understand, whether the clawback provision is such that it is able to be easily abused by a credit provider ‘churning’ loans (that is, is the practice of actively trying to have borrowers transfer or refinance loans something which is excluded by the terms of the contract?)

3 Section 24 of the Australian Consumer Law.
4 Section 25 of the Australian Consumer Law and section 12BH of the ASIC Act list more examples of unfair terms.

This is not an exhaustive list of issues, and a proper analysis may require a case by case analysis. If a broker has a concern about a standard form contract that has been forced upon
him/her/it, then the broker should seek legal advice.

Further, if the form of contracts that a broker enters into with his/her or its customers or clients could be considered unfair (according to the principles discussed above) then again, the broker should seek legal advice on possible ways to minimise the occurrence of such arguments.